Money Purchase Schemes

Also known as defined contribution (DC), a money purchase scheme does not guarantee a set level of pension to you when you retire. Instead, the benefits you will receive are based on two factors - the amount of money contributed to the pension fund and the investment performance of the assets into which it is placed.

When you retire the pot cash built up with your name on it, your pension fund, will then be used to create an income for you to live on in retirement.

All personal pension plans, including stakeholder pensions, are money purchase schemes. Many occupational pension plans are also now money purchase schemes.

Your contributions (and those made by your employer, if you are a member of an occupational money purchase scheme and such contributions are made) are invested and, it is hoped, grow in value your working life.

On retirement a portion of your fund can be taken as a tax-free lump sum (within permitted limits) and the remainder is used to buy a pension for the rest of your life - an annuity. It is then up to you to decide if you want to use up part of your fund to give yourself regular increases and /or provide for a pension for your wife or husband should you die first.

Last Updated: May 2007 © Moneyextra.com

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